The current patchwork of conflicting legal standards regarding alternative litigation financing (“ALF”) makes the use of choice-of-law provisions in ALF agreements a necessity.
As of 2014, twenty-nine states and the District of Columbia prohibit the assignment of personal injury claims as well as the proceeds of personal injury claims. Terrence Cain, “Symposium: I. Fringe Economy Lending – The Problem, Its Demographics, and Proposals for Change: Third Party Funding of Personal Injury Tort Claims: Keep the Baby and Change the Bathwater”, 89 Chi.-Kent L. Rev. 11, 21 (2014). Further, eight states prohibit the assignment of personal injury claims, but allow the assignment of the proceeds of personal injury claims. Id. at 22. Nine states allow the assignment of personal injury claims and the proceeds personal injury claims. Id. at 23-24. In several other states the legality third party funding of personal injury tort litigation is an open question. Id.
Another recent study concluded that 28 of 51 U.S. jurisdictions explicitly permit champerty in some limited form; 28 states permit maintenance in some form, and 16 of these 28 states permit maintenance for profit. Steven Garber, “Alternative Litigation Financing in the United States: Issues, Knowns, and Unknowns.” RAND Corporation (December 15, 2011). http://www.rand.org/pubs/ occasional_papers/OP306.
Companies providing ALF are not limited to doing business in only the states which explicitly allow the assignment of claims, or the proceeds of personal injury claims, or both. Choice-of-law provisions in the agreement between the ALF company and the borrower provide predictability and compliance with governing legal standards. As one commentor noted, “A carefully drafted choice of law clause could allow an [ALF company] to avoid an individual state’s prohibition on the assignment of personal injury claims or the proceeds of such claims.” Id. at 25.
A “choice of law” clause is a provision in a contract stating that the law of a chosen jurisdiction will govern a dispute between the parties. In order for ALF companies to do business in the approximately thirty jurisdictions whose laws restrict the assignment of personal injury claims, ALF companies often include a choice-of-law clause in their funding agreements, selecting a state that does allow the assignment of the claim itself, the proceeds of the claim, or both.
Members of American Legal Finance Association (“ALFA”) typically choose New York as their choice-of-law jurisdiction because New York case law generally allows the assignment of the proceeds of personal injury claims, and it has a well developed regulatory framework for ALF. See “Shifting Tides in Commercial Alternative Litigation Finance”, Texas Bar Journal, pp. 776, 777 (November 2015). As other states continue to develop and clarify their rules regarding ALF, those states’ law may become increasingly attractive as choice-of-law jurisdictions.
For further information, please feel free to contact Roni A. Elias, who leads the litigation finance team at TownCenter Partners, LLC, a boutique litigation funding company that funds plaintiffs and plaintiffs’ law firms nationwide. TownCenter Partners, LLC is a litigation funder with a social mission and continues to level the playing field in litigation. Mr. Elias can be reached at email@example.com or (703) 570-5264. © 2018 Roni A. Elias. All rights reserved.
Topics: Litigation finance, portfolio financing, portfolio funding, third-party funding, alternative litigation finance, state regulation, Choice-of-law, New York.